Calamos Investments has published its views on markets and the economy in its latest ‘Economic and Market Outlook.’
Although there is considerable uncertainty and many challenges on the horizon, they see signs of recovery and cause for cautious optimism. The global asset manager believes that the current economic downturn is likely to be severe but relatively short with the market presenting many opportunities for active and experienced approaches.
2020 will forever be remembered as the year of COVID-19. Economic activity has plummeted as countries struggle to address a global health crisis of staggering proportions. As investors panicked, the 11-year bull market in equities came to end in March, and the yield of the 10-year Treasury fell to all-time lows.
However, there are signs for cautious optimism: Led by the U.S., global monetary and fiscal stimulus has been sweeping in scope. The U.S. and other shuttered economies have begun to re-open, while Asian economies are showing real signs of recovery.
Since the March low, stocks have rallied, market volatility has moderated, and corporate bond spreads have tightened. There’s abundant liquidity in the markets as evidenced by surging convertible bond and corporate bond issuance. Many businesses have devised innovative solutions to adapt in this unprecedented period, and companies are accessing the capital markets in a bid to ensure they have adequate liquidity to weather the current crisis.
Calamos believes that the economic downturn is likely to be severe but short, unlike conditions we saw in 2008-2009. This time, the fiscal and monetary policy response has mitigated financial stress and by mid-year, the global output cycle is likely to be well on its way to returning to pre-pandemic capacity. Additionally, consumer balance sheets are in far better shape today than in 2008. There’s unprecedented pent-up consumer demand poised for release, most notably in the developed world where many have been paid a high percentage of their normal income while on furlough.
Nevertheless, global markets and the economy are still in a period of unprecedented uncertainty. Calamos is confident that effective COVID-19 treatments and vaccines will eventually be developed, but it is impossible to predict precisely when. In the meantime, there are a wide range of outcomes that could shape the market environment. These include the trajectory of the pandemic (most notably, the severity of second waves) and the economic responses. There are also a range of potential outcomes for fiscal policy and the U.S. election. Depending on the political climate, economies could be healing, but corporations may not be optimistic in the face of less business-friendly fiscal policy. Inflation is not a concern for 2020, but pressures are likely to build in 2021 and beyond, as supply chains become more localized and labor becomes scarcer.
Although we have passed through the liquidity phase of the crisis, Calamos believes that the solvency phase ahead could prove challenging and protracted. The global pandemic will have near- and long-term impacts on behaviors. There will be winners and losers, disruptors and the disrupted. Even with all the backstops put in place and a release of catch-up demand, not all companies will survive if they must operate with permanently reduced capacity.
As the economy recovers and reflationary pressures build, Calamos expects choppy markets and leadership rotation from quality-oriented secular growth to include more cyclical-oriented opportunities. Many areas of the market can benefit from this reflationary shift, including non-U.S. equities and smaller-cap names, supporting the case for diversification. However, uncertain markets also bring the need for risk-management and lower-volatility strategies into sharp perspective. Calamos has for decades developed strategies designed to help investors ride out volatility, participate in the markets’ upside with risk managed approaches, and prudently stay invested during uncertain times.
From an asset allocation standpoint, Calamos emphasizes that long-term perspective is exceptionally important, given the dangers of hopping in and out of the market. The economy and markets almost never recover at the same pace. Markets have already recouped a significant percentage of their first-quarter losses, and investors who sold at the low could have easily missed the turn.
Opinions, estimates, forecasts, and statements of financial market trends are subject to change without notice. The views and strategies described may not be appropriate for all investors. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations.